There’s No Business Like Non-Business

You might imagine that deciding whether or not an activity is a business activity would be quite straightforward. You might imagine that, but if you did so, you would be very wrong indeed. Certainly if you were trying to establish what a business activity was for VAT purposes.

HMRC have recently announced they are changing the tests they apply to determine whether an activity is a business activity. However, the topic remains a very troublesome one. A closer look at some other changes & contrasting approaches taken by HMRC and the ECJ will demonstrate.

The VAT Act 1994 states that ‘business’ “includes any trade, profession or vocation.” The ACT clarifies that provision of facilities to club members & entrance to premises for a consideration are both business activities. Although, that’s about all you get in the UK VAT legislation regarding what constitutes business.

“Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as economic activity. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.”

EU Vat Directive

HMRC rely on tests emerging from cases in the VAT Tribunal or higher courts. This is because the legislation is so general when it comes to define business/economic activity.

The two most influential cases over the years have been:

• Morrisons Academy (1978)
• Lord Fisher (1981)

from which emerged he 6 tests that have typically been the basis for resolving other cases.

These 6 tests are:

• Is the activity a serious undertaking earnestly pursued?
• Is the activity an occupation or function that is actively pursued with reasonable or recognisable continuity?
• Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
• Is the activity conducted in a regular manner and on sound and recognised business principles?
• Is the activity predominately concerned with the making of taxable supplies for a consideration?
• Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

However, HMRC announce they are changing their approach. The 6 tests arising from Morrisons Academy and Fisher are still useable:

“as a set of tools designed to help identify those factors which should be considered”.

Morrisons Academy and Fisher

However HMRC will no longer use them to determine whether or not an activity is a business activity.

Instead, HMRC will take the approach from the cases of Longridge on the Thames (2016) & Wakefield College (2018).

Their two new tests are as follows:

1. Does the activity result in a supply of goods or services for consideration?

HMRC explain that there needs to be a legal relationship between the supplier and the recipient. Meaning the first step is to consider whether a supply is makes for consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

• Is the supply made for the purpose of obtaining income therefrom?

HMRC explain the second test by stating that if there is a direct or sufficient link between the supplies made and the payments given, the activity is regarded as an economic activity. The Court in Wakefield College made a distinction between consideration and remuneration. Simply because a payment is received for a service provided does not itself mean that the activity is an economic activity. For an activity to be regarded as an economic activity, it must be carried out for the purpose of obtaining income (remuneration) even if the charge is below cost.

We wait to see what the outcome of the new tests will be, but it can already be seen that applying tests such as these often fails to deal with nuances, so are often never enough to provide a satisfactory conclusion.

For example, HMRC recently reviewed the VAT treatment of compensation payments following some high profile ECJ cases relating to payments due on the termination of phone contracts (Vodafone Portugal and MEO).

In the past, HMRC had treated such termination payments as being outside the scope of VAT as compensation payments. After Vodafone Portugal and MEO, HMRC announced that such termination payments would now become subject to VAT as further payment for supplies made under taxable phone contracts.

Interestingly, when HMRC previously treat these payments as being outside the scope of VAT, they didn’t think this means the phone companies carry out any ‘non-business’ activities. Only, that outside the scope of receiving income in the course of carrying out business activities.

Contrast this with HMRC’s position on Parking Charge Notices (‘PCNs’) issued by parking operators. Not only do HMRC consider PCNs to be outside the scope of VAT, they also consider the parking operators activities in issuing and enforcing PCNs to be ‘non-business’ activities. So they must treat incurring VAT on related costs as irrecoverable.

Parking attendants issue PCNs when a motorist contravenes a car park’s terms and conditions.HMRC’s current policy is that PCN revenue is outside the scope of VAT for the parking operators issuing the PCNs. This is because the PCN payment made by the errant motorist is neither payment for goods nor payment for services, but effectively a payment to compensate the parking operator for breaching the parking terms. This appears sensible, as does the argument that because issuing PCNs are a deterrent measure to prevent motorists from abusing car parks, the issue of PCNs by a parking operator is a necessary part of the parking operator’s business activities.

However, HMRC’s current approach is to treat the issue and enforcement of PCNs as a separate, distinct ‘non-business’ activity for parking operators (separate from the taxable business activity of operating/managing a car park).

Also contrast this with the position of the ECJ, who in the recent case of Apcoa Parking Danmark ruled that not only was the issue and enforcement of PCNs an economic activity for VAT purposes, PCN payments were subject to VAT at the standard rate.          

HMRC are aware of the Apcoa Danmark case when carrying out their review of the VAT treatment of compensation payments. Although ECJ decisions do not bind the UK, they do remain persuasive.  SoHMRC specifically state that if a PCN is:

“substantial and punitive and is designed to deter a breach of the terms and conditions of parking it will be outside the scope of VAT as the reciprocity needed to link it to the supply is lacking. If on the other hand it is effectively an additional charge for occupying a space, then it would be a standard rated supply. The level of the fee for breaching the parking terms in comparison to the standard parking fee may be indicative of which category a particular fine would be in.”

HMRC, VAT policy document on compensation payments

HMRC’s last comment about the deterrent value of a PCN is also interesting in the context of the government’s current attempts (via the Private Parking Code of Practice) to reduce the maximum value of PCNs issued for parking contraventions private land, so watch this space for further VAT news if the typical value of a PCN drops to £50 or less.

But until HMRC provide much clearer legislation and guidance, no number of tests will provide answers to all the questions. This guidance hopefully will particularly address how a taxpayer’s activities splits into separate business and non-business activities,

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